A weaker dollar has implications for expats earning in dirhams: Luke Sharrett/Bloomberg

The mighty greenback is not as mighty as it was; the US dollar plunged in value to lose almost a tenth of its value last year, measured against a basket of global currencies.

That is the dollar’s first decline in five years and its biggest annual fall since 2003 when it tumbled almost 15 per cent, according to the ICE dollar index. This year has also been pretty bumpy, at least so far.

This matters to UAE residents, because the dirham is pegged to the dollar. When the dollar falls, so does the value of your dirham earnings, relative to other currencies.

As far as your local spending goes, this is not much of a problem. While the dollar’s reduced international purchasing power may drive up the cost of some imports, the local effect should be minimal.

However, it will cause pain for UAE residents with financial commitments overseas, such as a mortgage in a foreign currency, as repayments have risen sharply in dollar terms. Also, any foreign investments that are priced in dollars will also be worth relatively less than they were before.

Last year's sharp plunge in the value of US currency has been given a name: the “dollar dump”. So why are people dumping it, and where does it go next?

Gaurav Kashyap, market strategist at Equiti Global Markets in Dubai and a columnist for The National, says recent dollar slippage follows several years when the greenback was all conquering. "The US Federal Reserve was the first central bank in the G7 to start hiking interest rates after almost a decade of ultra-loose monetary policy, with the first increase in December 2015."

The Fed hiked rates three times last year, with the final increase in December lifting them by a quarter of a percentage point to a range between 1.25 per cent and 1.50 per cent. There are more hikes to come, with the Fed forecasting three additional rate increases in 2018 and 2019.

Higher interest rates normally bolster a currency, as they attract more global money as investors pour in looking for a higher rate of return on their money. However, the effect is now wearing off, even though US interest rates are now higher than in other major economies. For example, they stand at zero per cent in the euro zone and 0.5 per cent in the UK.

Mr Kashyap says that now it is clear the United States is on a track to normalise rates, restless investors are shifting attention to countries yet to take action. “Markets are focusing on the European Central Bank and the Bank of England, in anticipation of when they will increase rates. Both have become more hawkish with their rhetoric and this has greatly contributed to dollar weakness.”

Markets expect the ECB to increase interest rates later this year. The BoE hiked rates in November last year, and analysts are assuming it will increase them again in May, to 0.75 per cent.

As a result, both the euro and sterling have put on some muscle. At time of writing, one dollar will buy €0.82, down from €0.95 at the start of 2017, which marks a sharp drop of almost 14 per cent over the period.

That's how aggressive the dollar dump has been, especially against the euro, which has been bolstered by Europe's recent rapid economic recovery.

Over the same period, the dollar’s buying power has slumped from £0.81 to £0.72, a drop of more than 11 per cent, despite the ongoing political and economic trauma of Brexit.

Mr Kashyap says the US is suffering political uncertainty of its own, with Washington in gridlock and the government divided. “It is also quite clear that the Trump administration is targeting a weaker US dollar, in a bid to make exports more attractive.”

With US stock markets widely seen as overvalued and now selling off, further trauma for dollar earners is to be expected, he adds.

However, there is no need for expat dirham earners to panic. “Currencies move in cycles and should ultimately balance out as far as your long-term investments are concerned.”

Gordon Robertson, director of the Me Group of businesses in Dubai, says this is more than a short-term dip - it's part of a long-term slide in the value of the dollar.

This means UAE residents are not as wealthy as they were, in international terms, and he suspects this will continue. "This will certainly make it more expensive to travel home to a non-US dollar country.

When you invest dirhams in a foreign stock market, your total return is made up of two figures: how the local market performs; and how its currency performs relative to the dollar.

This can work in your favour. Say, if the UK stock market rises 10 per cent and the pound also rises 10 per cent against the dollar, you get double the total return.

Mr Robertson says Far Eastern economies are currently enjoying rising GDP growth and company profitability, after struggling for the last five years, and if the trend continues they should make an attractive home for your money.

The euro zone is also on the mend. While both the US and Europe rose strongly last year, Europe did far better once dollar weakness is taken into account.

Mr Robertson suggests rebalancing your portfolio to make sure you have sufficient exposure to emerging markets, Europe and even the UK, despite its current EU travails. “This should help offset the negative effects of a weak dollar.”

If you have financial commitments in a different currency to your income, he suggests using a foreign currency service to hedge your exposure.

You can do this by locking into a regular monthly contract at today's foreign exchange rates, with repayments spread over the next two years. That protects you against further volatility and a drop in the value of the dollar for a set period.

Vijay Valecha, chief market analyst at Century Financial Brokers in Dubai, expects the dollar dump to continue, with the greenback forecast to weaken by a further 8 to 10 per cent this year. "This affects all UAE residents, hitting both the value of their earnings and also their investment portfolios, because they will mostly be priced in US dollars. There is compelling reason therefore to hedge this currency risk.”

Mr Valecha suggests diversifying your invested wealth into euros, sterling and other global currencies such as the Japanese yen, by building a diversified portfolio of real estate, equities and fixed interest bonds. “Your portfolio should be custom designed to suit your risk appetite, return expectations and individual circumstances. European and emerging Asian markets are expected to yield better returns with lower currency risk in 2018 and should form a sizeable part of the portfolio.”

This is sensible advice at any time for internationally mobile individuals. "It is always wise to have a well-diversified investment portfolio with a spread of different asset classes in multiple currencies, to protect you against the cyclical nature of stock markets.”

It is far easier to hedge your investments than your earnings, which would involve using complex hedging strategies that most people will not want to get involved in. In many cases, all you can do is wait for the tide to turn.

Mr Valecha says you can hedge your holiday plans, though. “You might want to visit countries where the dollar has not depreciated quite as much against the local currency, such as Chile, Mexico and South Africa. Maybe visit now, before they become expensive too.”

Steven Downey, chartered financial analysts candidate at Holborn Assets in Dubai, warns against putting too much faith in currency forecasts. “It is incredibly difficult to say what will happen to the dollar in future, given the variables involved. For example, you would expect the dollar to be riding high right now, as the Fed was first out of the gate on hiking interest rates, but it isn’t. Other factors, such as the growing deficit and recovering euro zone have knocked it back down”

If you want to benefit from future dollar weakness you could invest in non-dollar denominated assets, or vice versa if you expect a dollar recovery. "Most people should avoid playing currencies in this way, and make sure they have balanced exposure to all regions of the world instead,” says Mr Downey.

Faisal Durrani, head of research at global estate agency Cluttons, says the dollar weakness is a double blow for UAE residents. “It comes hot on the heels of a new regional economic reality induced by the oil price rout, which has driven the introduction of formal taxation.”

Many expat households have capitalised on the strong dollar in recent years by maximising remittances to their home countries, but those days are over for now. “We are likely to see outward remittances from the Arabian Gulf ebbing this year and a rise in locally denominated savings ratios, as households take a wait-and-see approach. This would be wise to help you offset the upward creep in local inflation, driven by VAT but exacerbated by a weaker dollar.”

The good news is that the global economy is growing, which should help keep the UAE bubbling along, boosting job security and earnings, Mr Durrani adds. “Local investments may look more attractive than overseas ones, which will, in the long run, help create healthier, more diverse and balanced portfolios, better placed to weather the tumultuous world of foreign exchange.”

Toby Johncox, principal representative for mortgage brokers Enness in the UAE, says many in the GCC area are now looking for havens around the world, and he tips a unlikely contender for 2018, the UK, especially for property investors. “I have long spoken of the opportunities in the UK, despite a climate of perceived uncertainty. With property prices remaining rather flat, there is room for movement when it comes to asking prices.”

He expects the power to strengthen further against the dollar, with “London coming back into favour as an international investment option, particularly as Brexit outcomes become clearer”.

Chris Canning, foreign exchange dealer at Argentex, says currency markets appear to have priced in negative news on the pound, and are very keen to buy on positive data. “Should Brexit negotiations progress, we could see sharp rises in the pound. For UAE residents, the opportunity to take advantage could quickly disappear,” he says.

Ashley Owen, head of investment strategies at AES Investments in Dubai, says as a general rule, UAE expats who are only expecting to be in the region for a few years should keep their investments portfolio largely in the currency of their future liabilities, to limit their exposure to exchange rate fluctuations. “Consider the currency in which you will ultimately draw down on your portfolio. So if you plan to retire in the UK, keep it denominated in sterling, rather than trading back and forth between the pound and dollar.”

For foreign commitments, locking into exchange rates using a foreign currency broker, to protect yourself from what could be a highly volatile year, is an option, but, warns Mr Owen: “Always ensure any service is regulated appropriately in your jurisdiction, for example, in the United Arab Emirates, currency brokers are required to obtain a licence from the UAE Central Bank.”

Finally, do not abandon the US. “It is still the world's largest economy, and is performing strongly relative to the UK, Europe. The country is a driver of innovation and growth, it makes up half of the world’s stock market,” Mr Owen adds.

Also, you should resist the temptation to chop and change your portfolio based on the movement of every market or currency. “Remain focused on your overall, long-term investment objectives rather than short term trading.”

Building a low-cost portfolio that’s well diversified across assets, markets, currencies and countries, and maintaining investor discipline provides the very best chance for long-term investment success, wherever the dollar goes next.